The Blog - Wind energy market analysis

Ilaria Valtimora

Why has South Africa's wind market ground to a halt?

South African state utility Eskom is mired in crisis, but the wind and solar industries are among the biggest losers. Ilaria Valtimora reports

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If you’re a wind developer in South Africa, you’ve probably been wearing a wry smile this week. Once again the nation’s incumbent coal interests have scuppered a series of key renewables deals. This is part of a saga that has dragged on since 2015.

Back then, the government awarded support to 27 wind and solar schemes totalling 2.2GW, and representing investment of ZAR58bn (€3.9bn), as part of its Renewable Energy Independent Power Producers Procurement Programme. The developers of these projects won the right to build their schemes with power purchase agreements from state utility Eskom. These PPAs were due to be finalised by the end of 2015.

But they weren’t. In July 2016, the then-chairman of Eskom, Ben Ngubane, wrote to South Africa’s energy minister saying that the firm would not sign any more power purchase agreements to support the country’s renewables growth.

Eskom delayed signing the deals because it said renewables cost far more than coal and that the PPAs would have set it back $4bn over the next 20 years. In the last two years, the South African government has kept asking Eskom to comply with the law and sign the PPAs – including then-president Jacob – but it has not done so.

Eighteen months later and these developers have been kept in a state of limbo.

There were brief hopes last week that these PPAs would finally be signed this week, on 13th March, after an intervention by energy minister Jeff Rabade. We were sceptical, as Eskom has proved resilient to such deadlines before.

It turns out we were right to be as, on 12th March the National Union of Metalworkers and civil group Transform RSA successfully blocked the signing of the PPAs. They argued that signing the deals would be “detrimental” to the working class and to the country. Numsa represents those who work in the coal mining sector, and so a move away from coal and towards renewables could be bad for its members.

The case is due to be heard in North Gauteng High Court on 27th March. Hopefully, the fact that the government has come out in favour of the signing of the PPAs will mean that the case is resolved quickly for wind. We can hope.

But, even if the court rules that Eskom must sign the deals, we can’t discount the idea that Eskom will continue to delay and obfuscate. This is its modus operandi, and the signing of these PPAs is not the only major challenge it is facing right now.

It is reportedly close to default with over ZAR350bn (€24bn) of debt, mainly due to its strategy of pursuing investment in coal. Eskom owns 15 coal-fired power plants and, in 2016, unveiled plans to invest ZAR324bn (€22bn) building two new ones.

However, a combination of stagnant power demand, rising maintenance costs for its existing power plants and a huge investment programme have left it with a liquidity crisis. It is limping on despite fears that it is close to running out of cash.

The situation has got so bad that the government has intervened, by issuing R350bn (€24bn) in guarantees to Eskom – of which R275bn (€18bn) have already been used – and recently named a new board in an attempt to reassure lenders.

This all puts a big question mark over what will happen to the PPAs.

The South African Wind Energy Association told us in February that it expected the deals to be finalised by the end of March. That doesn’t look like happening now – and it highlights a fundamental weakness of South Africa’s renewables industry.

The key point is that the development of renewables, including wind, in South Africa is deeply linked to Eskom. Investors have been attracted to the country because its REIPPPP offered stable PPAs. Indeed, Eskom utility so far signed 64 PPAs for a total of 4GW of renewables capacity.

But it is a captive market and so, if the state-owned business does not resolve its financial issues, the whole sector is at risk. To be honest, the whole South African economy is too.

Finance Minister Malusi Gigaba warned in January that if Eskom’s problems are not fixed urgently, the South African economy could collapse. He said “there would be no currency and no economy for the country if Eskom went belly-up”.

This is because the government has guaranteed Eskom’s debt. If the utility failed to meet its debt obligations, the government would be liable. However, South Africa’s public finances couldn't repay Eskom’s debt without issuing more government debt itself, putting further pressure on the country’s economy.

That could be the silver lining for developers waiting for Eskom to sign on the dotted line. Either Eskom is too big to fail, and so will be able to sign the deals itself, or the government will take over and sign them. That is the positive take.

But these developers have been holding on for so long, and it is tough to believe that Eskom’s position has changed overnight – even with the stunning drops in the cost of wind power over the last two years. It looks like the end game is in sight, but that will come as little consolation for companies facing yet more delays.